January 22, 2010
Index forecasts slower growth in first half
The USA TODAY/IHS Global Insight Economic Outlook Index predicts future real GDP growth (gross domestic product, adjusted for inflation) based on 11 leading economic and financial indicators. The paper and IHS Global Insight, a top-rated economic analysis and consulting firm, created this index to help readers track the economic recovery. The index predicts future gross domestic product (GDP) growth.
I like this model because unlike Conference Board’s index of leading indicators, the USA TODAY/IHS Global Insight Economic Outlook Index includes only “forward-looking” indicators that predicts future economic activity at least several months in the future (i.e. indicators of current activity are excluded). The Index concentrates information from 11 “forward-looking” indicators into one weighted composite indicator. The list includes a mix of economic and financial “forward-looking” indicators that have a strong correlation with future economic activity. As a group they forecast economic growth and are sensitive to signs of stress in the economy.
The December update of Index indicates the economy is recovering strongly from the recession.
According to the web site, the last months of 2009 are likely to post strong gains in real gross domestic product. The Index forecasts slightly slower growth in the first half of 2010 as the inventory cycle turns, credit conditions remain tight, and consumer spending loses the support of government stimulus programs.
Eight of the eleven leading indicators in the Index were positive contributors in December, up from five in November. Positive indicators include hours worked, building permits, real capital goods orders, stock prices, ISM export orders, the yield curve, and light-vehicle sales, all of which increased.
The Index web site includes an interactive chart that forecasts values for real GDP growth. It includes actual values back to 2001.
Commercial Defaults Pose Risks to Small Banks (from Bloomberg.com)
According to an article at Bloomberg.com, losses on commercial real estate loans pose the biggest risk to U.S. banks this year, troubling smaller lenders while unlikely to threaten the entire financial system. Regional banks are almost four times more concentrated in commercial property loans than the nation’s biggest lenders.
The default rate on commercial mortgages held by U.S. banks more than doubled to 3.4 percent in the third quarter, according to Real Estate Econometrics LLC, a property research firm in New York. Default rates in the first three quarters of 2009 have been the highest since 1993, according to the firm.
The failure of loans backing malls, hotels and apartments may impede the U.S. recovery as small- and medium-sized banks reduce lending and conserve capital to absorb losses. Tight credit could slow the cycle of investment and hiring that is critical for sustained growth according to the article.
Record Year for Mortgage Company Failures (from MortgageDaily.com)
More than 225 mortgage-related companies ended their operations or failed in 2009, more than any year since MortgageDaily.com began tracking data in 1998.
Bank failures lead the decline with 140 suspended and forced into bankruptcy. There were 66 non-bank closures and 19 credit union failures
It was the worst year for the industry since the firm began tracking the data in 1998. The previous record was set in 2007.
|Bank Failures (FDIC)||
|Credit Union Failures (NCUA)||
The most notable 2009 failures included Ocala, Fla.-based Taylor Bean Whitaker Mortgage Corp., Melville, N.Y.-based Lend America, and Montgomery, Ala.-based Colonial Bank.
U.S Population Growth in 2009 (from U.S. Census Bureau)
The U.S. Census Bureau announced in December that the U.S. population grew by 2.7 million in 2009, an annual growth rate of 0.86%. Every region of the country grew, with the West and South experiencing the strongest growth, at 1.23% and 1.16%, respectively.
Texas gained more people than any other state between July 1, 2008, and July 1, 2009 (478,000), followed by California (381,000), North Carolina (134,000), Georgia (131,000) and Florida (114,000), according to the latest U.S. Census Bureau estimates.
California remained the most populous state, with a July 1, 2009, population of 37 million. Rounding out the top five states were Texas (24.8 million), New York (19.5 million), Florida (18.5 million) and Illinois (12.9 million).
Wyoming showed the largest percentage growth: its population climbed 2.12 percent to 544,270 between July 1, 2008, and July 1, 2009. Utah was next largest, growing 2.10 percent to 2.8 million. Texas ranked third, as its population climbed 1.97 percent to 24.8 million, with Colorado next (1.81 percent to 5 million).
The only three states to lose population over the period were Michigan (-0.33 percent), Maine (-0.11 percent) and Rhode Island (-0.03 percent). The latter two states had small population changes.
The inexorable demand that this growth creates, for homes, cars, retail spending, etc., is an important engine in our economy, and powerfully differentiates the U.S. economy from many other developed nations that are experiencing, or will experience, population declines.
January 15, 2010
Will Home Prices Go Down in 2010?
Real estate researchers differ on where prices are headed in 2010
As the articles below indicate, some experts are saying prices have hit bottom in the home market. Some are even saying prices are undervalued in many markets. Others are predicting that prices will fall even further throughout 2010. Here a few of the current predictions s by some the country’s leading firms.
Fiserv Lending Solutions, a financial analytics firm, predicts that prices will decline an average of 11.3 percent in 342 of the 381 markets it covers.
Moody’s Economy.com foresees another 8 percent drop, with Arizona, California, Florida, and Nevada feeling even more pain.
Shari Olefson, author of Foreclosure Nation: Mortgaging the American Dream, predicts a national average decline in prices of about 10 percent in 2010.
Peter Schiff, president of Euro Pacific Capital and the most bearish of the bears, says real estate prices could possibly fall another 30 percent before they hit bottom.
NATIONAL ASSOCIATION OF REALTORS®Chief Economist Lawrence Yun sees it all differently. He predicts home prices will rise more than 3 percent in 2010.
Much of the discrepancy among these predictions is over statistics surrounding the foreclosure market. Many foreclosed homes and other distressed properties that are now owned by banks have yet to be listed for sale. The volume of this so-called ‘ghost or shadow inventory’ could be substantial enough to depress already steeply falling prices when it does go on the market and banks are moving slowly to list repossessed homes for sale, which could mean that housing inventory is even more bloated than current statistics indicate.
RealtyTrac, the online marketer of foreclosed properties, recently discovered that it has far more foreclosed properties listed in its database, which the company compiles using courthouse records, than there are listed in the multiple listing services (MLS) maintained by real estate agents.
RealtyTrac looked at listings in four states, California, Maryland, Florida and Wisconsin, and found that they contained only a third of the foreclosures it has in its database.
The National Association of Realtors calculates official housing inventory statistics using data from the multiple listing services. By that measure, there were 4.2 million existing homes for sale in November, an 11.2-month supply at the current sales pace, up from a 10.3-month supply in October. Many properties that should be listed on the MLS are not listed on the MLS therefore underestimating the situation. And if that’s the case, it could take much longer for the housing market recovery than analysts currently expect.
Opinion offered by Scott R. Lodde
Cities With the Biggest Price Drops (from Forbes.com)
Cities that experienced housing recessions were affected as much by local economic factors as they were by national ones, according to a study by Local Market Monitor for Forbes magazine.
To find the cities where home values fell the most, Local Market Monitor looked at where the Federal Housing Finance Agency’s Home Price Index had fallen the most from that market’s peak, to the third quarter of 2009. The FHFA index is derived from data on all mortgages bought or backed by Fannie Mae and Freddie Mac.
Cities that have lost the most value are concentrated in the Midwest where unemployment has taken its toll, and in parts of California, Florida, and Nevada where the rising cost of housing encouraged home buyers to gamble on their ability to afford housing long term.
On average, housing markets on the West Coast lost the most value – 21.6 percent since their peak. Florida lost 31 percent. The Northeast lost an average of 8.6 percent, and the Midwest on average lost only 5.6 percent.
The cities that lost the most home value in the South are concentrated in Florida, where Port St. Lucie tops the list at -46.43 and Cape Coral is second at -46.38. Somewhat surprisingly is that Naples is third on the list at -43.63.
Here are the top five cities in each region that lost the most value:
- 1. Merced, Calif.: -62.11 percent
- 2. Stockton, Calif.: -54.29
- 3. Modesto, Calif.: -52.42
- 4. Vallejo-Fairfield, Calif.: -47.62
- 5. Las Vegas-Paradise, Nev.: -47.53
- 1. Port St. Lucie, Fla.: -46.43 percent
- 2. Cape Coral-Fort-Myers, Fla.: -46.38
- 3. Naples-Marco Island, Fla.: -43.63
- 4. Bradenton-Sarasota-Venice, Fla.: -41.52
- 5. Fort Lauderdale-Pompano Beach-Deerfield Beach, Fla. -39.93
- 1. Detroit-Livonia, Mich., -30.66
- 2. Warren-Troy-Farmington Hills, Mich., -27.95
- 3. Flint, Mich., -27.47
- 4. Ann Arbor, Mich., -20.37
- 5. Jackson, Mich., -17.30
- 1. Providence-New Bedford, R.I., -17.30
- 2. Worcester, Mass., -16.17
- 3. Atlantic City, N.J., -16.15
- 4. Poughkeepsie-Newburgh, N.Y., -14.60
- 5. Barnstable Town, Mass., -14.48
Housing Undervalued? (from Global Insight)
Housing researcher Global Insight recently released a study of U.S. housing prices that points to the magnitude of the collapse of values.
Nationwide, Global found housing values were about 10 percent undervalued, based on a model that examines interest rates, household incomes, population, and historical price patterns. That’s a modest number compared to metro areas hardest hit by the housing recession.
In Fort Lauderdale, Fla., Global calculated that housing prices were 24 percent undervalued as of the third quarter of 2009. Three years ago, it said the area was 44 percent overvalued. Global calculates that Las Vegas is now undervalued by 41 percent compared to being 33 percent overvalued in 2006.
Report: Home Prices Likely to Hit Bottom in March (from First American CoreLogic)
Home prices in 45 of the largest housing markets are expected to fall another 4.2 percent before they hit bottom in March, according to First American CoreLogic’s Loan Performance Home Price Index.
By October 2010, prices are expected to be heading upward again by about 1 percent compared to 2009.
The report warned that this progress could be jeopardized by an increasingly large “shadow inventory” of homes owned by banks but not yet on the market. The problem is particularly acute in Michigan and Ohio cities, the report said. It projected a 12.7 percent further decline in values in Detroit, an 11.4 percent decline in most of the rest of southeast Michigan, and a 6.3 percent fall in Cleveland.
The report expects the strongest recoveries next year in California cities. These include:
- San Francisco, up 5.7 percent
- Los Angeles, 5 percent
- San Diego, 4.7 percent
- Sacramento, 4.6 percent
January 7, 2010
South Florida Foreclosure Filings Top 97,000 In 2009
According to a report from CondoVultures.com, more than 97,000 foreclosure filings were initiated in 2009 in the tri-county South Florida region (Miami-Dade, Broward, and Palm Beach counties) representing a 29 percent increase compared to nearly 76,000 actions in 2008.
In 2007 there were more than 32,000 foreclosure filings.
Peter Zalewski, a principal with Condo Vultures® LLC stated that, “The newfound willingness of lenders to suddenly work with borrowers to modify mortgages or approve short sales has undoubtedly had an effect on the number of foreclosure filings in South Florida.”
More than 200,000 foreclosures actions have been filed in the tri-county South Florida region since 2007, with 46 percent of the actions occurring in the last 12 months.
On a county-by-county basis, Broward County, where Fort Lauderdale, Hollywood, and Pompano Beach are located, has experienced the greatest number of foreclosure actions with more than 87,000 filings since 2007. This represents 43 percent of all foreclosure actions filed in South Florida.
Palm Beach County, where Boca Raton, Delray Beach, and West Palm Beach are located, ranks second with nearly 59,000 foreclosure filings in the last three years. Palm Beach County accounts for 29 percent of the actions filed in South Florida.
Miami-Dade County, where Miami Beach, Coral Gables, and Sunny Isles Beach are located, ranks third with more than 54,000 foreclosure actions filed since 2007. This represents 27 percent of the regional total, according to CondoVultures.com.
2009 Costliest Year for FDIC (from FDIC, Wall Street Journal, CNBC)
Regulators seized 140 banks in 34 states in 2009, generating a loss of nearly $36.5 billion for the Federal Deposit Insurance Corp. See FDIC Failed Bank List
By comparison, there were 25 bank failures in 13 states in 2008, producing losses of at least $10.4 billion.
South Florida’s BankUnited, based in Coral Gables, produced the greatest estimated loss for the FDIC in 2009 at $4.9 billion. Texas’ Guaranty Bank ranked second with an estimated cost of $3 billion to the FDIC. Alabama-based Colonial Bank ranked third with a loss of $2.8 billion for regulators.
At the end of 2009, the FDIC boosted its 2010 budget by 56 percent to $4 billion to manage further shutdowns. The total budget will increase from $2.6 billion and the set-aside for bank failures doubles to $2.5 billion over this year, according to a proposal approved by the FDIC board. The agency staff will increase to 8,653 next year from 7,010 in 2009.
According to a Wall Street Journal article, the deposit insurance fund dropped by $18.6 billion during the third quarter of 2009 to negative $8.2 billion, as the Federal Deposit Insurance Corp. set aside $21.7 billion in provisions for additional bank failures. This is only the second time in the agency’s history that the balance has fallen into negative territory.
Speaking on CNBC Squawk Box, John Kanas stated that the US banking system will lose some 1,000 institutions over the next two years. His private equity firm bought BankUnited of Florida in May.
Of the 81 failed banks this year, two have been successfully acquired by private equity, he said. Regulators also allowed the sale of IndyMac Bank of California earlier this year to another private equity firm.
CMBS Delinquencies Reach New All-Time High (from Trepp)
Commercial real estate delinquency rates continue to climb, with Trepp reporting that overall delinquency rates on CMBS reached 6.07% in December, 2009, up from 5.52% in November, and a far climb from 1.21% from December of 2008. The lodging industry led all real estate types in November, 2009 at 13.47%. Recent reports by Deutsche Bank and other institutions suggest that office property delinquencies will continue to climb through 2010 even as the worst of the problems in retail and lodging begin to abate. According to a recent Cushman & Wakefield Sonnenblick Goldman Capital Markets Report, $55M loan on Palm Beach Mall in West Palm Beach, FL is currently appraised at a value which represents a loan loss exceeding 85% while the recent sale of a Chicago hotel generated a net loan loss in excess of 95%.
Industry observers say a majority of loans due through 2014 may be underwater, meaning more banks will be forced to restructure loans to avoid costly foreclosures.
U.S. banks had a historic $1.3 trillion of commercial mortgages outstanding as of Sept. 30, with about $60.5 billion of them delinquent. Approximately $650 billion in banks’ boom-time CRE loans are coming due over the next four years, with more than $150 billion maturing in 2010.
January 4, 2010
National Association of Realtors 2010 Forecast (from NAR)
If 2009 was the year of economic recovery, 2010 will be the year of growth, says NAR Chief Economist Lawrence Yun.
Existing-home sales in 2009 rose to an estimated 5 million units for the year, a 2 percent increase over the 4.9 million sales in 2008. For 2010, Yun is forecasting sales of 5.7 million units, a 13.6 percent increase.
The key to recovery in 2009 was the lower end of the existing-home market. Fueled by the huge number of distressed sales-which drove down prices nationally by an average of 13 percent for the year-buyers returned to the market looking for bargains.
Also helping were continuing low interest rates (5.2 percent on average for 2009) and the first-time home buyer tax credit, which the IRS says had been tapped by an estimated 1.4 million households halfway through 2009.
As a result of the sales pick-up, inventory for homes priced at $250,000 and under, which is well under the $417,000 conforming loan limit, improved to just 4.6 months in 2009, according to NAR data. Nationally, the inventory of homes above the $729,750 threshold remained above 40 months throughout 2009.
Yun is forecasting improvement in 2010, as the strong performance at the lower end helps kick start the upper-end market. The new-home market is expected to improve as well. NAR estimates sales this year to jump to 549,000 units, up from 397,000 units in 2009, and housing starts to reach 752,000, compared to 564,000 units last year.
Yun makes it clear that, even under their best-case scenarios, the performance of 2010 will lag behind what he considers to be a market in equilibrium. Although Yun’s estimated 2010 sales volume of 5.7 million is close to what it was in pre-boom 1999, that level is low when the country’s population, now 30 million larger than it was a decade ago, is factored in. Ideally, sales should be closer to 6 million, he says.
One reason for the subpar performance is continuing slow household formation, a key precursor to home sales. Until young people stop doubling up in rental units or living with their parents in such large numbers, sales will continue to lag, Yun says. That shift will be fueled by job growth and consumer confidence.
Once household numbers increase, sales may ignite because the market is seeing a lot of pent-up demand. More than 16 million renter households at the end of 2009 had sufficient income to buy a median-priced home, up from just 11 million in 2000, before the boom, Yun says. Once they get off the fence, sales will start heading up to a level reflective of the population.
Yun predicts home prices to grow 3.6 percent in 2010, a significant rebound from 2009’s 12.9 percent national price decline.
Yun forecasts economic growth of 2.8 percent, up from a recessionary -2.5 percent in 2009. See NAR statistical table.
More Credit Defaults Predicted (from Bloomberg.com)
Mark Greene, the CEO of credit-scoring formula maker FICO, predicts that the next six months will lead to more mortgage and credit card defaults.
Greene points to 10 percent unemployment and depressed home prices as the reason why no bailout can effectively help the 30 percent of home owners who are underwater on their mortgages. He says the reality of this is so clear to many home owners that they are changing their priorities and paying off car loans and credit card debt before they pay the mortgage.
“I’m a notch less sanguine than some financial observers are,” said Greene, in an interview with Bloomberg. “We still have a very considerable period of working out credit issues.”
More Home Owners Walk Away (from the Wall Street Journal)
First American CoreLogic, a real-estate information company, estimates that 5.3 million U.S. households have mortgage balances at least 20% higher than their homes’ value, and 2.2 million of those households are at least 50% under water. The problem is concentrated in Arizona, California, Florida, Michigan and Nevada. See Stategic Defaults by State
They are leaving the deal behind not because they can’t pay but because they don’t want to. A study by researchers at Northwestern University and the University of Chicago concludes that as many as 25 percent of defaults are driven by strategy, not necessity.
A foreclosure stays on a consumer’s credit record for seven years and can send a credit score (based on a scale of 300 to 850) plunging by as much as 160 points
Brent White, an associate law professor at the University of Arizona, points to actions by banks themselves to avoid staying in bad business deals as an example of why homeowners should make a decision “unclouded by unnecessary guilt or shame.”
Recently, financial services firm Morgan Stanley announced that it is turning five San Francisco office buildings back over to its lender two years after it purchased them when the market was at its priciest. The buildings are estimated to be worth about half of what Morgan Stanley paid.
“This isn’t a default or foreclosure situation,” spokeswoman Alyson Barnes told Bloomberg News. “We are going to give them the properties to get out of the loan obligation.”
Morgan Stanley is apparently current on the loan, so this is what is known as a “strategic default.”
Some might ask: If strategic defaults are OK for banks, why aren’t they OK for ordinary homeowners?
Coming Soon: More Foreclosures (from Associated Press)
More than 1.7 million homeowners were verging on foreclosure this fall, making it likely that these houses will soon end up on the market one way or the other, driving down overall housing values.
The number, up from 1.1 million a year earlier, is likely to keep rising through the middle of next year or later.
“We’re going to be dealing with high levels of distressed (sales) in the marketplace for at least a couple of years,” says Mark Fleming, chief economist of researcher First American CoreLogic.
Already, the foreclosure backlog is equal to nearly half the 3.8 million unsold new and existing homes currently on the market, First American said.